Following a lackluster performance in the manufacturing sector, the latest business activity as measured by the purchase managers index showed a decline in the services sector as well. The data indicated that the pace of growth in the U.S. economy might have slowed more than expected in December.
However, other measures indicate that the economy was still in expansion.
The Institute of Supply Management’s non-manufacturing PMI report which tracks the services sector spanning across health care to construction and finance fell to 57.6 in December. The decline in the index comes after activity registered a reading of 60.7 in November.
December’s non-manufacturing PMI data was worse than expected. Economists polled forecast that business activity would ease to 58.4 during the month. Still, despite the decline, the index reading above 50 indicates expansion in the sector.
The data signaled the fact that momentum was easing, but business outlook remained firm overall. Most of the respondents to the survey were concerned about the U.S. and China trade tariffs despite the temporary cease-fire and a resumption of talks between the world’s first and second biggest economies.
"It is a little bit of cooling off, but it's still a good operating rate of growth," said Anthony Nieves, head of the ISM survey, of the December result.
The sub-indexes of the ISM’s non-manufacturing PMI showed some mixed figures. The new orders component of the index ticked higher to show an increase to 62.7. The data signaled that momentum remains on a firm footing. Prices paid index increased, but the pace was slower than expected.
This was attributed to the lower energy prices. The data was however seen to be consistent with the view that a shift in the monetary policy mix of the declining balance sheet and higher interest rates could lead to the economy slowing in the coming months.
The ISM's employment index in the non-manufacturing sector fell to 56.3 in December. In November, the employment index was at 58.4. The data signaled a slowdown in the pace of job growth in the services sector.
However, the December payrolls report showed that employment rose the highest with the services sector accounting for 227,000 jobs in December. This was on top of November's net job gain of 146,000.
The decline in the employment index in the non-manufacturing sector was similar to that in the ISM’s manufacturing PMI report. The manufacturing activity was also weaker in December as the index fell to 51.4 and was the most significant monthly decline since the end of 2008.
The decline in the manufacturing PMI prompted the Fed Chair, Jerome Powell to state that it was something worth keeping an eye on.
The data comes as the Fed hiked interest rates in December by a quarter basis point. The Fed also signaled two rate hikes for the rest of 2019. However, concerns remain on whether the U.S. economy would be able to digest further rate hikes.
The Central Bank has come under pressure from President Trump for hiking interest rates. Besides the rate hikes, the U.S. and China trade wars remain the main narrative. While both economies have signaled intentions to resolve the trade wars, there is no particular outcome.
For the moment, both nations agreed to a 90-day true which is set to expire end of March. Last week, the U.S. and China began formal talks to reach an agreement to put an end to the trade tariffs.
The markets were seen briefly cheering the trade talks with the equities pushing higher. The week before, Apple’s dire warning on sales due to China saw the markets trading cautiously.